A Little Bit Richer

James: This series is brought to you by L&G, helping you build a future that's a little bit richer.

Iona Bain: Hello. I'm Iona Bain, and welcome to A Little Bit Richer, brought to you by Legal & General. This is part two of our investing series, where we're moving from mindset into mechanics. So if you listened to the last episode and thought, " Yep, I'm in, what do I do next," this one's for you. Today we're going to be breaking down the practical side of investing. We're going to be looking at the different ways to invest, common mistakes people make, and how to review your investments over time without panicking every moment the market moves. And to get under the bonnet of all of this, let's welcome back founder of Vestpod and host of The Wallet podcast, Emilie Bellet. Hi, Emilie.

Emilie Bellet: Hi, Iona.

Iona Bain: Welcome back. Now, we're going to ask you to do another 30- second summary for us, since the last one you did was so good. So in 30 seconds or less, what is an investing portfolio and why does it matter? Go.

Emilie Bellet: An investment portfolio is simply your baskets of investment. Inside it, you will find a mix of equities, pieces of companies. You will find bonds, which are loans to companies and governments, cash, real estate, and sometimes also other asset classes. You know that investments can go up and down, so that's important that you spread your risk, and that's why instead of picking just one investment, you're building a portfolio.

Iona Bain: Spot on, I would say. Can you talk us through the different components of investing, i. e. the different steps that you go through in order to become an investor?

Emilie Bellet: So when you start investing, first thing, you need to have a plan. We talked about this also in the first episode. You need to have an emergency fund. You don't want to have a lot of debts that are very costly. You have a plan why you are investing, for your investing for the medium term, for the long term, maybe for retirement. Once you have your plan, you will need to pick a platform. This can be quite overwhelming. The platforms are a little bit like a shop where you will be able to buy your investments.

If you're a complete beginner, I will look at a platform that will manage your investments on your behalf. You may have heard of robo-investing, for example, of robo-advice, also some maybe ready- made portfolios that could be managed for you. So basically the platform will look at your goals and they will suggest a portfolio for you that will have a mix of equities, that will have a mix of bonds and a little bit of cash. And by investing, there's a lot of investors like you, and you're going to be put into one of these portfolios. So that's a very easy way to get started with a minimum knowledge.

If you are a more advanced investor, you may want to customize this portfolio. You may think, " Oh, I really like this industry. I like these funds. I want to follow the market." So you can look at buying yourself, investing via funds or maybe via individual investments, even if it's usually a lot more riskier to buy single stocks than buying by funds. So this is the platform, so you can look at either something that's managed for you, a robo or a DIY platform.

Once you're on this platform, the first thing you need is some kind of an umbrella. We call it an account. And when you invest, you can look at two different accounts usually that are tax efficient. It's very important to look at tax efficiency, so using your allowance first maybe for your pension. You may have a workplace pension, but you could also have a personal pension or SIPP, self- invested personal pension, and the other account is a Stocks and Shares ISA. So there's different accounts that you can look into.

Once you've chosen this account, it's a matter of you putting some money into your account, and then this money will be invested in the stock market. With the robo, that's going to be made automatically for you in a selection of funds. And if you're investing with a DIY platform, then you'll have to pick your investments. So that could be a little bit tricky, so maybe you start with the robo and later on you can move to a DIY investment platform. With the DIY investment platform, this is a little bit like a supermarket. And you'll have a lot, like tens of thousands of funds and stocks. So you will need a little bit more knowledge, but at least it's a little bit more flexible.

Iona Bain: So that gives people a really good idea of what they need to think about if they're getting started. How would you go about building your portfolio step by step, and what does good investing look like in practice?

Emilie Bellet: I think there's not one way to invest, but you have to really remind yourself. Why are you investing money? You're investing money because you want to grow your money over time, you want to achieve your goals, you want to beat inflation. So once you have your cash savings and you're looking at investing a little bit of your money, how do you start picking your portfolio? I think there's this notion of risk that's introduced when you talk about investments that you didn't necessarily have with cash savings.

So what does it mean to actually take risk? That can scare people, and especially women in the investment community say, " But I don't want to lose money." So risk is not about losing money. I'd love to reframe risk a little bit. And for me, risk is also an opportunity. When you have money in a cash savings, you're not getting a lot of interest for your money. So when you move your money into investing, it's because you think you could get a higher rate of return ... nothing is guaranteed, of course ... but with taking a little bit more risk. So that's important when you build up your portfolio, that you understand the relationship between risk and what you actually put into your portfolio.

So if we look at the components on a typical stock market portfolio, you will have the first category that we call stocks. So stocks are little pieces of companies. So when you buy a stock, you own a small part of a company. And how do you make money? Maybe these companies grow, they hire amazing managers, they make great decisions. People have a very positive view about the company. The value of the companies grows, the stock price goes up, and that's one way to make money. Companies may also generate a lot of cash and they can start paying what we call dividends, so you also get some income. So that's how stock works.

Now, you don't need to invest in individual stocks, but you can find funds. So instead of buying stock into one company, you invest via a fund and you will get like hundreds of different companies, 500 companies, and that's going to be an amazing way to diversify. So again, putting your money into a lot of different things. So if this one company I invest in fails, then I have like 499 other companies that will support my portfolio, so that's your first category, shares.

The second one is bonds, and bonds are loans to companies or government, and they're usually here in your portfolio for a little bit more stability. So they will react differently to market fluctuation, so that's why it's important that in your portfolio you have shares that will grow quicker, or potentially, but they are also more risky, and bonds, that tend to be a bit less risky with a slightly lower growth.

So when people put together a portfolio ... and that could be on robo- advisors, that could be yourself ... you're trying to have the proportion of shares, of equities, and of bonds in your portfolio. The portfolio have a higher risk when there's more equities, and you could see portfolios that are 100% equities. They tend to be very risky, and portfolios that have a mix of bonds and equities and the more bonds, there's less risk. It lowers your risk. Also you could have cash in portfolios, and that will lower your risk.

So when you're trying to find out the level of risk, it's really trying to find the right portfolio. So if I'm quite young, I can usually take more risk. Why is that? Because if there are market fluctuations, I will have more time for my money to recover until I need the money, if we're talking about retirement, for example. So if you're in your 20s, you could probably take a little bit more risk than someone who is in their 50s or 60s, who sees retirement very close and needs to change their portfolio to have maybe a lower allocation to equities, maybe bigger on bonds and cash, because they want more certainty. So that's going to be the main thing when you look at building a portfolio. And whether you do it yourself, whether you use a robo-advisor, it's really trying to keep in mind how I build these portfolios.

Iona Bain: And can you just explain, for anyone who doesn't know what equities are?

Emilie Bellet: So the term equities means that we're looking at buying small pieces of companies. You will sometimes hear the term shares or stock, so this is really looking at buying companies.

Iona Bain: And people might have heard vaguely of this idea of active investing versus passive investing. Could you just unpack what those mean and why you need to understand the difference between them?

Emilie Bellet: So when you invest, there's two ways to build these portfolios and to invest. So if you're a passive investor, it means that you just want to follow the market. And the market is a collection of companies in different industries, in different geographies, and you're trying to get the market return. So when you're a passive investor, you can invest into a selection of funds or you could have a very broad multi- asset fund, index funds. Ideally, it's a low- cost fund also that doesn't cost you a lot of money. And then this way, you're going to invest in the whole market, and you're not necessarily going to adjust your investment when something happens.

Now, you could also be a more active investor, and someone who's an active investor means they're going to pick and choose what they want in their portfolio. So they won't necessarily try to get the market return, but they will try to beat the market. It's not always going to be the case, because as we know, when we want to become active investors, it's going to take us so much time to research. Some people, it's their full- time job to actually be active investors. So I would recommend from anyone who's a beginner, who's starting to invest, or also who's been investing for a little while, the passive approach is actually really helpful in terms of also not reacting to market fluctuation, having a long- term approach, and letting your investments actually do the work over a longer period of time.

Iona Bain: And in the past 10 or 20 years, we've seen a lot of passive investment funds, like index funds and exchange- traded funds, become a lot more popular, especially with beginner investors. Why is that?

Emilie Bellet: So I think investing via funds, it's such a great way to get what we want, is this diversification also. So not having just one investment into one stock or one bond, but actually buying a collection of investments. That's what you want for your portfolio, is making sure you have a little bit of everything of every asset classes. So these types of funds are now widely available on platforms and you could find index funds that will track the whole market, but you could also find funds that will track just a specific industry or will track a specific geography.

So that's really interesting in terms of you trying to get exposed to these industries via funds, and you won't have just one investment, but you will have a lot of investments. So again, these funds will always try to take the best in their markets or the top performance in their market. Some index funds will look at the biggest companies.

Iona Bain: Could we just explain what an index is, in case people aren't sure?

Emilie Bellet: So an index is just a way to follow maybe the top companies in the market. And this way, when you invest via an index fund, for example, or via an ETF, you're getting a collection of a lot of investments of a lot of companies instead of just going and buying one company. And that gives you something that's going to help your investment return over a longer period of time, which is diversification. That's going to help manage your risk, because your investments will be spread into a lot of different smaller investments.

Iona Bain: So the FTSE 100, for example, is an index that people could follow if they wanted to. And you do hear about people making a lot of money by investing just in five or ten really hot companies. And I think back to the 2010s and the FANGs, Facebook, Amazon, Netflix, Google, and the idea that these companies are all you ever need for your investment portfolio because they just do so well, why would you invest anywhere else? What's your thinking today on investing in hot companies like that, and not maybe looking at the wider market and seeing what else there is to offer?

Emilie Bellet: So I mean, I've made this mistake myself of trying to pick individual companies, and that's actually really risky. So you're hoping for higher return, but it's quite concentrated. And with being more concentrated, you also increase your level of risk. So if you just have three, four companies, one of them fails, then that's a big part of your portfolio. Then you have to know that some of the big tech companies, for example, today, they make most of the larger index funds and markets. So even when you invest into these index funds, you're going to get exposure to this company.

 If there's some companies you really want to invest in, either you look at some indices that will hold these companies ... they will have them as a holding, and then by investing into the whole fund, you will have exposure to these companies ... or otherwise you keep it maybe as a small portion of your overall portfolio. So you still get the exposure, but that's not going to be 100% of your exposure into a selection of companies.

Iona Bain: That's really good advice. So let's just talk about reviewing our investments and pensions and how often we should do that, whether we should think about rebalancing at certain points in our life, how we can rebalance without panicking or harming our returns.

Emilie Bellet: So rebalancing is quite interesting, is when you've built your initial portfolio, remember that you had equities and you had bonds in your portfolio. Because stocks, equities ... we can use the same term ... they tend to grow faster, over a slightly long period of time, you will see that your allocation is changing. So if you add maybe 50% of equities and 50% of bonds, you'll see that maybe this 50% is now 60% or 70%. And what you want to do with rebalancing, it means that you have to sell some of these stocks, equities, and add more bonds, so basically come back to the original allocation. If you want to do that, if it's still in line with your goals, so this is why we rebalance portfolios, so that's the term. If you're investing with a robo-advisor or something that's managed for you, this rebalancing is automatically done for you.

Iona Bain: That's clever.

Emilie Bellet: That's clever. And now if you're doing it on your own, you have to check that you're still in line and you have to rebalance yourself. In terms of reviewing your investments, this is really personal, but I would say don't check every day, maybe not every week, but maybe once a year, twice a year, really sit down, look at your investments. I think it's really important that you check your pensions. You check that your contributions have been going in, you check the type of funds you're investing in. Is it the default funds, or are you actually allocating your money yourself? Reviewing your strategy, reviewing also the fees on all of these platforms. Unfortunately, investing is never free, so you have to check how much money you're paying, and sometimes you need to adjust your investments or you need to adjust maybe the platform, how much money you're actually putting into your investment pots.

And the other thing is looking at personal goals. Do you have any major change in your life? Are you getting married? Do you have kids? Have you changed job? Are you now an entrepreneur? This will all have an impact on how much money you make, how much money you save, and you may want to change your allocation. Maybe your goals have changed. So that's really important, to take the time and look at your investments and look at your whole financial life.

At Vestpod, we love the term of having a little money date with yourself, so maybe once a month, taking the time. It could be different things. It could be listening to a podcast about money and investing, but it could also be looking at your investments, looking at your pension, calculating your net worth, looking at your budget, but really having in your calendar this time to review regularly your investments.

Iona Bain: Money dates won't feel as romantic as real dates, but you will feel a hell of a lot better after you've had a money date, that's for sure. So what tools or approaches do you like personally from managing investments?

Emilie Bellet: I think that could be quite simple. Your investment app or your investment platform is already doing a lot of this for you, so I think what you need to check is that you're still matching your goals. That's really important. You need to check the performance of your investments. We've said, and we're going to say it again and again, that investments go up and down over time and that your capital could be at risk, so it's really checking what has been performing, what has been underperforming, and trying to think about, " Okay, what do I do going forward with these investments?" It's the diversification, so checking what have you been investing in sometimes. You can also check the diversification.

So sometimes we've been investing in funds and we start adding maybe a few stocks, and then we realize that we have maybe the same investments in two different pockets or in two different vehicles, so it's making sure we're still happy with that. Looking at the fees, how much have you been paying to the platform or how much are you paying to buy and sell your investments, and looking for duplicate investments.

So I would say it's really about declaratory sometimes, because as you add up and maybe a lot of your investments are automated, you may not realize that you're adding a little bit of complexity in your portfolio. So it's maybe taking a step back and cleaning a little bit your portfolios.

Iona Bain: So lots to think about there. And again, people will probably want to digest all of this over a cup of tea or coffee. So what's one quick thing that people could do whilst they wait for their cuppa to boil?

Emilie Bellet: If you have a little bit of time, you should think about automating your investments. Boring investing is actually quite good, and knowing that every month there's a little bit of money going into a saving account and an investing account for your future self is actually super valuable.

Iona Bain: Yeah. So start that process today and ...

Emilie Bellet: Start small.

Iona Bain: ... reap the benefits. Yeah. Start small. Absolutely. Thank you so much, Emilie.

Emilie Bellet: Thank you very much.

Iona Bain: Well, that brings us to the end of our investing series. I hope it's empowered you to make that next step in your investing journey, and to remember it's all about creating wealth for future you. Of course, your investments can go up as well as down and there are risks involved.

Thank you so much for listening to A Little Bit Richer. If you find this helpful, feel free to share it with someone who might need a boost in their investing confidence. This podcast is brought to you by L&G. You can keep up with the show on YouTube, TikTok, and Instagram @ legalandgeneral. If you have a question or a topic that you would like answered on the show, then you can get in touch on our socials. Until next time, see you soon, and thank you for watching and listening.